Things on coming up with the holidays?
It's the usual.
Usual.
Traveling, I bet you.
We'll be back in Raleigh, in-laws, brother-in-law lives in Raleigh, and then to Idaho. Plans, trains, and automobiles with little ones.
Wish me luck.
Yeah, wish me luck. All right, let's get started here. I'm Kyle Joseph. I cover the specialty finance and fintech space here at Stevens. Pleased to have with me Steve Cunningham, soon to be CEO of Enova, currently CFO for a couple more days, a couple more weeks. Congratulations, Steve, first.
Thanks.
Almost. For those not familiar, Enova is an online financial services firm serving both underbanked consumers and small businesses. The company really expanded into the small business space when it bought OnDeck in 2020.
Yep.
It has funded over $65 billion of loans since inception. I'll turn it over to Steve to introduce himself and talk a little bit about how the company's evolved recently. I'll lead questions, but would love to make this as interactive as possible. Do not be shy. Thanks, Steve.
Thanks, Kyle. Thanks for joining us today. As Kyle mentioned, Enova, we've been around for 21 years. We started way back in the early 2000s as the very first—I wasn't there—but as the very first online-only payday originator at the time. It became a division of Cash America a few years later, was their online lending arm. In 2014, we were spun. We've been public for 11 years. Since that time, we've evolved quite a bit. We're no longer in payday at all anymore. We go to market on the consumer side with two brands. One is CashNet, which is our brand that we've had since the beginning. It's really more of our subprime consumer focus. We offer lines of credit and installment loans. We also have a brand called NetCredit, which is what we would call more near-prime.
That would go down to just around 36% APR, where we also offer lines of credit and installment loans. On the small business side, we've been in that business since around 2013. We started a line of credit business, [Denovo], back then. As Kyle mentioned, we substantially increased the scale in that business with the acquisition of OnDeck in 2020. Today, we offer lines of credit and term loans across a pretty broad APR segment or across APR segments. We serve about 900 or so industries across 49 states in the District of Columbia. We've had great success over the years. We're very focused on following our unit economics. We originate for our portfolio only, so we're not selling loans. I'm joined here, Scott Cornelis, who's our Treasurer, will be our CFO at the beginning of the year.
He's done a great job building our balance sheet and our funding programs. We're predominantly securitization and secured funding to support the growth in the balance sheet. Today, our balance sheet is about $6 billion or so in assets. Quite a bit of growth over our time period.
Great. Very helpful. I think, obviously, the topic of the day or the topic of third-quarter earnings is the health of the underlying consumer. I mean, obviously, with inflation, some headlines about the auto industry. Obviously, given your vast customer base, we'd just love to hear what you're seeing in terms of the health of the underlying consumer.
Yeah. We've talked about the consumer on our calls now for quite a bit. There's been a lot of anecdotes and a lot of people looking for the proverbial canary in the coal mine. We've seen pretty consistent results in our consumer segment. Keep in mind, we're talking about a non-prime, underserved consumer segment that, to some extent, is always sort of in a recession, as we might say. They tend to have high credit loss expectations. They tend to be a bit more fungible in the job market, probably more blue-collar, hourly-type workers. If you just take a look at our performance, our credit metrics have been in range with our expectations. We have a regular range of expectations that we expect our net charge-offs to be in, depending on the time of the year because there's a lot of seasonality.
Our growth rates have been healthy. Our credit expectations have been in line. Actually, on our last call, we pointed to accelerating our sequential growth going into Q4. We expect our consumer credit metrics to actually improve a bit in Q4 as well. Even though there's a lot of anecdotes and a lot of worries about certain corners of the consumer side, particularly in subprime auto, which is very different than what we do, we're an unsecured-only lender. As Kyle mentioned, we're online-only. There are two things to get a loan on the consumer side. You need to have a job or a verified source of income, and you need to have a checking account because we're not dealing with cash. We're dispersing and collecting predominantly through the ACH network.
Yeah. There has been a lot of discussions about kind of the K-shaped economy. Are you seeing any sort of discernible differences between, call it, NetCredit and CashNet?
Like I mentioned, I mean, we talked about CashNet on our call. Last year, we were seeing some growth sort of above what we historically had seen, mainly from some things that we did ourselves to make the application process a little more frictionless. That business has kind of settled back into normal expectations. Our NetCredit business has been the fastest grower. We're in more states across the country than we are with CashNet, and it has continued to perform really well. In fact, we saw in our installment business overall about a 30% increase year-over-year in Q3, which was really driven by loans to existing customers that were looking for refi and debt consolidation opportunities. In our case, existing customers tend to have a better credit profile than new customers because we know them. We've seen them before.
I think both businesses are performing pretty well and pretty consistent with what we would expect for the time of year.
Very helpful. If we go back to 2022, I think we went through, I'd call it, a mini credit cycle. I think if I look back on all the companies I covered, I think Enova's credit performance was, call it, the most stable or less impacted. How are you able to quickly identify credit issues? How quickly can you work through them? I think, obviously, your portfolio duration is a key competitive advantage there.
Yeah. Credit is a huge focus, as you can imagine. There's a little bit of what I would call the subprime paradox. A lot of people think that the customers that we serve are generally more risky. I would say that the paradox related to that is they do tend to have higher credit costs in terms of expected credit costs that you charge for. Through the cycle, they tend to be less volatile. There have been plenty of studies done, in particular around unsecured credit cards, that show prime, superprime, trough to peak tend to be much more volatile than subprime. There are a couple of reasons for that. The loan sizes tend to be smaller. The repayment frequencies are typically faster. We do not have a lot of monthly pays. We get paid every other week, so you have fast feedback.
The loan sizes are duration and loan sizes are smaller, as I mentioned. We are looking at every week, we are staring at initial defaults on recent vintages that we've just originated. Those initial defaults are really good indicators of lifetime losses for the vintages that we're putting out there. If we see things that we don't like, and sometimes we're too aggressive, sometimes we're too conservative, we're always tuning back to a level that we're trying to achieve. That level is really driven by our focus on unit economics. We have a very refined culture around an ROE hurdle rate across all of our products. Obviously, credit is a really big input into that. We're always trying to achieve that optimal state.
We are course-correcting hundreds of times a year to try to make sure that we're landing at a spot where we're serving as many customers as we can while delivering shareholder returns that align with that unit economics that I talked about. I would also say, that allows us to be a lot less volatile because what ends up happening is it's more of a growth shock when things go wrong versus a credit shock. If you think about that for just a minute, because we see defaults levels that we don't like, we just start trimming originations going forward. That starts to slow things down. The loss emerges very quick. You get through that in a hurry compared to what you might see for a typical prime or superprime book.
The other thing that keeps us stable and that really differentiates us in the marketplace is there's really not another company that has consumer and small business, the products that we offer at the scale that we offer them. Unlike consumer, which tends to be a bit more homogeneous, so it's very dependent upon labor, the small business side of things is a lot less homogeneous. We underwrite into a mini number of industries, but the concepts are essentially the same. Not a lot of monthly pays, fast loss emergence, smaller loan sizes, shorter duration, which, again, helps us more quickly identify issues, course-correct more quickly, and provide a lot more consistency in our operating results as we move over time.
Got it. Yeah. I was going to talk about that, yeah, specifically in terms of credit performance on the small business side, what you're seeing in terms of, call it, consumer confidence or not consumer confidence, I guess, business owner confidence, and really kind of remind us how that's been trending.
Yeah. There's a lot of surveys out there about small businesses, like the NFIB survey. We do one with Oraculus, which is a small business cash flow platform. The one we just put out recently, it's above 90% for the small business respondents that expect to have more growth in the coming year, which is a pretty high number. I think other surveys are kind of pointing to the same thing. The other thing that's pretty noteworthy in the survey that we do is probably two-thirds of those respondents don't even go to commercial banks for credit anymore. While they may have a checking account, which is how we operate with them in terms of disbursement and collection, they don't typically go to the banks for credit anymore. A majority of them have been turned down in the past. These customers are looking for speed and certainty.
We're unsecured. I think overall, the sentiment in the small business space is looking pretty good right now and has for quite some time. We've been growing that portfolio north of 30% year-over-year for a couple of quarters now.
That's a good segue. Yeah. Kind of wanted to go through the supply and demand dynamics of each portfolio. Obviously, you highlighted the really strong growth on the small business side. To me, that indicates a relatively healthy competitive environment or favorable, I should say. Walk us through other providers in the space, whether there's been capital inflows, outflows, what you've been seeing.
Yeah. There are tens of millions of small businesses in the United States. It's a large target market. If you just look at new business application volume, I think FRED at the St. Louis Fed, they published these stats. You can see since COVID over the past five years, that volume has been pretty elevated. Those are going to be companies that are going to be coming into the target market over time. We tend to focus on companies that are a year and a half, two years old. The demographic of our business, they've been in business for 11 years, 10, 11 years, and they tend to have around $500,000 of revenue. There are a lot of companies out there that are like that. When you look at our brand, OnDeck is a very well-known brand in the space.
There are no public competitors anymore in our space. There are a number of private. They tend to be smaller and a bit more focused on different products or different areas of the specific market or loan size. We do not have a pure-play competitor, and we are larger than all of them.
Got it. Sorry, I'm jumping all over the place, but been reading a lot about kind of changes from the BBB. How are you thinking about positioning into 2026, specifically thinking about higher tax refunds and then changes in healthcare costs and everything?
Yeah. This will be like my 10th tax refund season since I've been at Enova. They're all a little different. Everybody says, "Oh, they're going to be a little bit more, a little bit less." It's always a little bit hard to predict. I would just say, in particular, as it relates to the consumer portfolio, a little larger refund, always good for credit. The demand for credit doesn't really change a ton cumulatively over time. What you would typically see, if you have a little bit larger refund, it might push your demand curve around a few weeks. Q1 is typically a low point for consumer credit growth, mainly because of the post-holiday and the tax refund season time. It could affect when refunds start and when they end, when the demand for credit begins and ends.
If you just kind of look over time, you see a lot of consistency in how we've performed in the first half of the year. I would expect even if refunds are a little bit higher or if the timing is a little bit different, you'll continue to see that similar pattern. Best credit performance of the quarter of the year is typically in the second quarter. You typically see a trough in volume in Q1 with a pickup in Q2.
How does that play out in the small business space? Do you have similar seasonal patterns, but maybe to a lesser extent?
Yeah. SMB tends to be a lot less seasonal as it relates to the quarterly volume. You have certain months, like February is kind of a quiet month, whereas December tends to be a pretty heavy month. You do not have that same sort of seasonality. There is a lot more consistency through the year, which, again, is a nice marriage of the two businesses together. It gives you a lot more stability and consistency as you move through the year compared to competitors or others who just have one or the other. It is a nice business that we think provides a lot of stability alongside the consumer business.
Got it. Obviously, it's a conference in 2025. I got to ask about how Enova is leveraging AI and ML in terms of marketing and underwriting.
Yeah. We like to differentiate. I mean, everybody likes to talk about AI. We have been using what we would call applied AI, which is machine learning, for many, many years. There is a page in our investor deck, and you can get a feel for how we use machine learning models and automation through our customer lifecycle. More recently, generative AI, everybody has been talking about that. I think there are definitely some opportunities to leverage that. I will kind of classify it in a few different buckets, though. Number one is efficiency. I think a lot of companies are looking at ways to use it to become more efficient, whether you need fewer employees or the employees are working more productively, however that may fit.
Think about the third-party platforms you have in your walls and the agents inside of those that can get you information more quickly to make your employees more productive. Secondly, there's the faster insights, right? You think about if you have a lot of MIS, we have a lot of MIS dashboards. If you can get the takeaways more quickly, you could start to make decisions that could be more impactful more quickly as well. Lots of opportunity there. Third is around the customer experience, right? We've made a lot of progress in our contact center, not just with AI, but with automation to help our agents be quicker to be able to respond to customer inquiries. We have a lot of calls. That does a couple of things. It makes them more productive, so you need less of them.
It also is a better customer experience because the customer has to spend less time on the call and gets a better answer. Those are kind of the ways we think about where we're pushing on AI. You'll notice that I didn't talk about underwriting models. That's where machine learning is where we feel like is the best spot for underwriting. Maybe generative AI at some point in the future, but it's a better fit for fraud, as an example, where things are happening very quickly and you worry less about making a bad decision that you can correct later than using it in sort of a pure underwriting mode.
Got it. Just on the heels of third quarter, I'm hoping you just touch base, refresh us on some of the highlights from your third quarter and then what you changed for your outlook for 2025.
Yeah. I mean, Q3, we printed, as I mentioned before, really strong growth in small business. Small business has been very consistent, both in terms of credit and in growth. On the consumer side, we gave some examples of how we do that course correcting that I mentioned before, like how we get early reads and we make adjustments. We spent a lot of time talking about our consumer business, which, by the way, the credit metrics were all inbound on what we would expect for the third quarter of the year. We provide ranges for our consumer business for Q1, Q2, Q3, Q4 because of that seasonality. We have been operating within those bounds for a really long time.
We can move within those ranges, which we've been on a little bit on the higher end of the range, which is fine, but that could be impacted by growth and by mix as well. We gave some examples of a specific product where we were trimming away to make sure we had those initial defaults I mentioned earlier in the right box. We ended the quarter with some of the best performance we'd seen in a really long time, which then has allowed us to sort of re-accelerate that growth, as I mentioned before, for consumer. Going into Q4, we expect 10%-15% year-over-year top-line growth. We would expect around 20% year-over-year EPS growth, which we've been printing that level of EPS growth now pretty consistently over a long period of time.
Got it. From a long-term perspective, if we look at Enova in five years, what should we expect to see in terms of the mix between consumer and small business, potentially other products or anything? Yeah.
Yeah. We're kind of agnostic to the mix, right? As I mentioned before, we have a unit economics approach that's very focused on return on equity. We allocate equity to our products. We expect, on a fully loaded basis, those products to generate returns that are acceptable. If our teams find opportunities, we're not capital constrained. We are willing to fund those opportunities. We kind of go a little bit where the opportunities are. You'll see SMB has been growing a bit faster than consumer. That hasn't always been the case. Usually in certain times of the year, you see consumer grow a little bit faster than SMB, like in the back half of the year. There has been a tilt toward small business in the portfolio. It's in the low 60% in terms of the percent of the total portfolio.
We do not have to necessarily sit back and target. I think you should expect over, if you look out over the next several years, we are going to continue to operate, we think, in these large target markets. They are still very fragmented. We feel like we are very advantaged from a couple of points of view. First of all, we are online only. We do not have any brick and mortar. There has been a huge shift, particularly since COVID, towards comfort doing all of your financial business online, regardless of the demographic. We think we have always done that. We are way ahead of others who are trying to catch up there. We also have the breadth of product that I mentioned before. We will continue to follow the customer preference.
Some of the advancements we've made in consumer line of credit, for example, exiting payday, those are all examples of innovation and moving to where the customers want to be met. We will continue to do that with our products. There is no reason to think that we can't generate meaningful growth over the near term, even at the size that we are, given the size of the markets and the fragmentation. Even at our size, we do not have a significant amount of share. That is going to give us a lot of greenfield organic opportunities to kind of go out and meet those customers where they want to be met.
That's great. Obviously, sentiment has shifted in the equity markets, but I'm just curious what you're seeing on the credit markets and how you're funding the growth you've talked about.
Yeah. We have historically, and Scott's done a great job of building a treasury organization and building our securitization programs. When I joined a little over nine years ago, we had private lenders providing sort of training wheel securitizations, as I would call them. They're expensive, not fully optimized. I think as we continue to execute, and as you know, credit is sort of king, which is, it's king of everything, including in terms of how you fund the business. Today, we use a combination of things on the secured side. We have a number of warehouses that we pledge and draw on, both on the consumer and the small business side. Those are largely bank facilities now, so money centers and regional banks. When we think about when those warehouses are filling up, we go to the term markets and issue term securitizations.
In some cases on the small business side, they're rated, which taps into a different investor, institutional investor base. Scott and his team just finished up closing out a small business fixed rate three-year term deal that was around $260 million that priced at like five and three quarters, which really good spreads. We continue to see our spreads perform very, very well, which ties into the credit performance of what we're seeing. We also have a large revolver ABL structure. It's about $825 million. That gives us sort of flexibility in between issuances and through the seasonality. We have a couple of high-yield term seniors unsecured term notes that are out there as well to sort of fill in around you can't securitize 100%, so you need some term debt in the structure along with equity.
We tend to target a tangible capital ratio of around 17%-20%. Today, we're sitting right around 18%. A very healthy equity base as well as a nicely diversified funding stack that gives us a lot of nimbleness.
Yeah. Despite the growth, you guys obviously generate a lot of strong cash flows. I think it'd be helpful just to hear how you're thinking about deploying those between growth, M&A, capital returns.
Yeah. One thing I didn't mention on the funding side is because of our repayment frequencies, we have a lot of operational cash flow every quarter, typically between $400 million and $500 million of cash coming available to us before you even need to tap into the external facilities for growth. In terms of capital allocation, number one is the organic growth. Providing growth and credit to our customers. We like the returns there. We've been pretty consistent. Our third quarter return on equity, even with a nearly 18% tangible capital ratio, was right around 28%, so very healthy. Number two has been buybacks. These aren't mutually exclusive. We have enough capital to do both. With those ROEs, we tend to have excess capital to put to work to maintain our leverage. We prefer buybacks for a couple of reasons. One, it's a little more efficient.
We feel like we're not fully valued. It's a topic that we've talked about quite a bit. Our EPS compound average growth over the past decade has been about 20%, yet we still trade lately in the seven-eight times future next year's earnings. We feel like there's a couple of things, like number one, that subprime paradox that I mentioned earlier. Non-prime customers do tend to be higher credit costs, but they tend to be less volatile over time. The fact that we have both a small business and a consumer franchise together is pretty unique out there and provides a lot of stability to provide some consistency, which we think should promote a higher valuation. As I mentioned before, they complement each other. They're not offsets clearly, but they complement each other with one being less homogeneous than the other.
We use the buyback to opportunistically buy back our shares. We run a program all the time to buy more, obviously, when the shares are lower, and we buy less when the shares are higher. It is a way for us to return that excess capital that we have, but also to opportunistically support our valuation and be a buyer of our shares when we feel like we are not where we need to be. We think there is a lot of room for opportunity in the valuation as we continue to tell the story, we continue to perform, and there is greater understanding of the power of what we put together at Enova.
Great. Kind of walk us through the marketing strategy in each segment and any trends you've been observing there.
No, we're pretty sophisticated and broad on the marketing side. On the consumer side of things, probably two-thirds of our approach is direct. That would basically be where we're pulling customers directly to us, whether it's direct mail, mass media, search engine, pay-per-click, whatever it might be. About a third of that is indirect. That would be lead providers, affiliates, offer wall kind of thing. We're pretty much on all the names that you would know. We don't keep score on a cost to acquire. As I mentioned before, we're an ROE-driven shop. If we can generate risk-adjusted cash flows that are healthy and you pay a little bit more to get those, we're willing to spend the marketing on those. For us, it's an input. Obviously, our marketing teams do a fantastic job of minimizing our cost-to-funding account.
It is more around can we acquire customers and vintages that are going to generate the right returns for us versus what we are paying to acquire for those particular customers. On the SMB side, it tends to be a little bit more indirect historically. That means we are working with a network of brokers and third parties that work with these small businesses to find credit. OnDeck and Headway Capital, our two brands, are very well-known in those networks. If you are familiar with indirect, you need to be there all the time. You need to be consistent. You need to be predictable. Our size helps us do that. We are there all the time, whereas some of the smaller competitors who might be more episodically funded are not there all the time. It gives us quite an advantage on that channel.
Increasingly, we've been pushing more into the direct channels where we're pulling small businesses directly into directly to us. You may have seen our OnDeck ads on some of the news channels, Loan Cannon, Loan Falcon. They're kind of funny. Took a shot at the humor. Increasingly, that's becoming an important marketing channel for us as well.
Got it. Just talk to us a little bit about the operating leverage of the model, obviously being online only.
Yeah. If you look at our expense categories, our fixed costs, we all tend to be our G&A costs, general administrative expenses tend to all be fixed. Those grow, obviously. We spend money where we need to spend, but they grow much more slowly than revenue. At the end of the third quarter, they were sitting right around 5% of revenue. That's come down quite a bit over the past few years. That is the true scale part of our expense base. Our operations and technology expenses, probably about 30% of those are fixed. There are some scale opportunities there as well. Even on the variable side, as we get larger, there are opportunities to take volume pricing and different price tiers to continue to drive those expenses relative to revenue lower as well. You have seen that. I think today it sits right around 8%.
That has come down quite a bit over the past few years. Marketing tends to be more purely variable. We talk about around 20% of revenue. The better indicator really is originations, but it is a little easier to get, helps Kyle model when we say 20% of revenue, roughly. As a percent of revenue, depending on the time of the year, there could be some opportunities to scale that a little bit as we push on marketing efficiency or try to find some channels there that are more efficient through time. We are really pleased. If you look at our overall efficiency type ratios, we are kind of leading the way with our scale and operating leverage.
Yeah. Always appreciate when you make my job easier. Thank you for that. Yeah. I'm ready. I think we've got through about everything. You highlighted kind of the disconnect between growth and valuation. As we wrap up here, anything else you think investors are overlooking or underappreciating?
Yeah. I mean, I think I kind of mentioned it before. The things that we tend to talk an awful lot about is the subprime. I call it the subprime paradox. Just because customers are in the non-prime space doesn't make them riskier. I'll define risk as volatility. Particularly if you've spent decades underwriting to them and understanding them. I think we've done a really good job of that. Number one, I would leave people with that. If you look at our charge-offs, yeah, they tend to be higher than what you would see in the prime space, but over time, they tend to be less volatile. When things are worsening in the macro, what you will tend to see is not a credit shock, but more of an origination shock.
By that, because of that quick feedback loop that I was mentioning earlier, we'll be cutting as we see credit performance that we don't like, which means you'll start to slow them, you'll start to slow down. It is less about the credit volatility that you might typically see in more of a prime book. I would say then the other big thing to leave you with is just the valuation. I mean, if you just take a step back and look at our consistency over a very long period of time and the advantages that I've mentioned in terms of how we're positioned in the segments that we play in, both to be able to serve the customers and compete effectively given our funding and scale, we think there's still a lot of opportunity with our valuation given the way we're positioned.
That's great. Thank you, Steve, for your time and perspective. Thank you guys for attending. Appreciate it.
Thank you all for listening.